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The U.S. House of Representatives took a large protectionist step yesterday for the U.S. airline industry by passing the 2009 FAA Reauthorization Act, H.R. 915, 111th Cong. More than just a funding bill for the Federal Aviation Administration, the Act contains provisions which would sunset all antitrust immunity for international airline alliances three years after enactment (sec. 426(e)); tighten the statutory requirement that domestic airlines be under the "actual control" of U.S. citizens by excludiing foreigners from "control[ing] all matters pertainingto the business and structure of the air carrier" (sec. 801); and mandating twice-yearly inspections of foreign repair stations by FAA personnel (sec. 303). (A sample of previous discussions of the Act and its potential impact can be found on the blog here, here, and here.)

All three provisions are a mistake. With respect to international airline alliances, much ink has already been spilt discussing the clear consumer benefits they bring and unmasking the myth that they are inherently anticompetitive. See, e.g., Michael E. Levine, Commentary, Airline Alliances and Systems Competition, 45 Hous. L. Rev. 333 (2008). What has not been sufficiently highlighted is the role of allowing alliances to develop and flourish in enticing foreign partners, most notably the European Community (and previously its individual Member States), to sign Open Skies agreements with the U.S. For example, the full implementation of the 1996 U.S./Germany Air Transport Agreement was preconditioned on U.S. antitrust immunity for an expanded Lufthansa/United Airlines alliance. This practice is explicitly referenced in Paragraph 48 of the Memorandum of Consultations to the 2007 U.S./EC Air Transport Agreement, 2007 O.J. (L 134) 4, where the U.S. assured the EC that the Agreement "will satisfy the DOT requirement that, to consider . . . an application from foreign airlines for antitrust immunity or to continue such immunity, an Open Skies agreement must exist between the United States and the homeland(s) of the applicant foreign airline(s)." Under the version of the Act passed by the House, this assurance rings hollow. Even though the alliance provision provides that airlines may reapply for approval and immunization after the sunset, the time. money, and uncertainty involved will likely dissuade them from doing so. The EC, which has come to take a generally positive view of alliances in light of the continuing dominance of the nationality rule, could perceive the regulatory hostility toward these arrangements embodied in the Act as undermining the liberalizing "spirit" of the 2007 Agreement and souring the ongoing second stage negotiations.

Also detrimental to U.S./EC aeropolitical relations is the Reauthorization Act's amendment to the U.S. statutory requirements on ownership and control of domestic carriers. Introduced originally as part of the stillborn 2007 FAA Reauthorization Act, H.R. 2881, 110th Cong., the provision drew sharp criticism from Rep. John L. Mica, ranking Republican member of the House Transportation and Infrastructure Committee. Mica warned that the language could be interpreted by a future Administration as requiring that all middle and upper management positions in U.S. airlines be occupied by U.S. citizens. If this provision is enacted, it would throw another bolt on the door to authentic liberalization in the context of U.S./EC second stage negotiations. The amendment may also contradict the 2007 Agreement's provisions for branding and franchising opportunities. Cf. U.S./EC Air Transport Agreement, art. 10(8) & Annex 5.

Finally, to the Reauthorization Act's requirement for twice-yearly inspections of foreign repair stations by the FAA. While no one doubts the need for robust safety standards for civil aviation, the language of the Act leaves no room for granting latitude to aeropolitical partners ready, willing, and able to harmonize high-level safety oversight. The inspection requirement has prompted the European Commission to threaten pulling out of an aviation safety agreement it signed last year with the U.S. which allows for the mutual recognition of each party's safety certification for repair stations. Without it, the European Aviation Safety Administration is prohibited under EC law from recognizing FAA certification and would thus have to engage in its own independent, time-consuming, and costly inspections of U.S. stations. The European Commission has estimated that the additional inspections could cost the U.S. airline industry up to $35 million a year compared to the $1.1 million it would spend under the bilateral. Ironically, the inspection provision, which has the strong support of labor unions seeking to protect jobs at domestic stations, could lead to new costs being passed on to the U..S. carriers which use them--costs which may very well result in increased ticket prices, a further drop in demand for air services, and the loss of numerous aviation-related jobs.

All hope is not lost, however. It may be some time before the U.S. Senate gets around to passing its version of the Act and there is no guarantee that it will contain all of these protectionist provisions (at least not in the form passed by the House). The cries of the European Commission and the Air Transport Association, the U.S. industry's primary lobbying group, may not fall on deaf ears. And yet, with the rising ride of protectionism worldwide and the heavy influence of labor on a Democrat-dominated Congress and Administration, there is a well-founded fear that at least one of these troubling measures will make it onto President Obama's desk. By that point it will be too late and international civil aviation could find itself thrust into a new era of managed trade where political wrangling, not entrepreneurial acumen and market discipline, dominates.

Reuters is reporting that the pilots union for United Airlines is seeking to delay the U.S. Department of Transportation's final order granting approval and antitrust immunity for Continental Airlines to join the Star Alliance. As discussed previously on the blog, the DOT gave the expanded alliance tentative clearance last month, marking the first time two separate domestic carriers have been allowed to participate in a single alliance with immunization for coordinating international services. According to United's pilots, the expanded Star Alliance could lead to an outsourcing of tens of thousands of U.S. jobs and pay cuts for workers. United shot back to the charge by stating that the DOT itself has recognized that "alliances have created some 15,000 U.S. airline jobs and enable service to communities that would otherwise not be served." Additionally, United expressed perplexity at why its pilots had waited so long to make their objections known.

The DOT's protracted process for applications seeking approval and antitrust immunity affords stakeholders, including airline pilots, more than ample opportunity to express their concerns. It is important to remember that the Star Alliance received approval and immunity from the DOT two years ago. See Dkt. No. OST-2005-22922, Order 2007-2-16 (Feb. 13, 2007). If United's pilots were concerned about having their jobs "outsourced" to, say, Lufthansa or Air Canada, the 2007 order should have been the target of their ire. The more recent decision to add Continental does not in any way expand the international scope of the Star Alliance, nor does it give rise to any risk of the alliance being used as a cover for a pseudo-merger between United and Continental. Under the DOT's order, both carriers remain within the reach of U.S. antitrust law for any conduct in any air transportation market solely within the United States. Even if the DOT does give ear to the pilots' complaints, it seems that it would only undermine Continental's chances of becoming part of Star, not the approval and immunization granted to the alliance as a whole two years ago.

It's possible that this latest move by United's pilots is intended as retaliation for the innovative United/Aer Lingus joint venture set to begin in 2010. Under that arrangement, Aer Lingus would operate flights between Madrid, Spain and United's Washington-Dulles hub with the latter supplying the feeder traffic and marketing, but none of the workforce. Arguably, the United/Aer Lingus plan is more akin to "outsourcing" than an international alliance where all participants are feeding new traffic into each other's respective markets. While it's difficult to say what (if any) impact this latest quarrel will have on the Star Alliance going forward, with a labor-friendly Administration in power and increased (though largely unfounded) scrutiny being placed on immunized alliances, Star's members certainly have some reason to be concerned.

The full text of the recently signed EC/Canada Air Transport Agreement is available online here. As discussed previously, by far the most interesting development in this Agreement is the provision for a progressive liberalization of traffic rights, up to and including full ownership and control of each party's airlines by nationals of the other party.

On May 7, the International Aviation Law Institute was honored
by the presence of UK Secretary of State for Transport Geoff Hoon and a group
of his associates for a free-ranging discussion of the future of international
air transport liberalization.Accompanying the Secretary of State were HM Consul General James Clark;
Tim Figures, Private Secretary, UK Department for Transport; Francis Morgan,
Head of International Aviation and Safety, UK Department for Transport; Joanna
Millington, Press Officer, UK Department for Transport; David Leam, Special
Adviser, UK Department for Transport; and Jonathan Daniel, Press and Public
Affairs Officer, British Consulate-General, Chicago.

Secretary of State Hoon, who spoke earlier this week to
the International Aviation Club in Washington, D.C., on U.S./EC aviation
relations, shared his thoughts with the Institute on how the United States can
work with its European partners to establish a sustainable policy for aviation carbon
emissions.While optimistic that the
Obama Administration is open to a cap-and-trade system comparable to the EC's
Emissions Trading Scheme, Mr. Hoon recognized that progress on the issue has
thus far been slow.Further discussion took
place on certain protectionist elements of the pending 2009 FAA Reauthorization
Act that may adversely impact the ongoing negotiations for a second stage
U.S./EC Air Transport Agreement.Institute
Director Brian F. Havel, whose recently published book, Beyond Open Skies: A New Regime for International Aviation,
proposes an authentic globalization of the air transport industry within the
framework of the U.S./EC Agreement, indicated that the worldwide economic
crisis must abate before foreign ownership caps and cabotage will be
dismantled.In his view, protectionist
impulses will fill a vacuum in U.S. aviation policy at least until we learn how
the Obama Administration will approach air transport issues.

At the end of the discussion, Professor Havel presented a
copy of his new book to Mr. Hoon. For the full text of the Secretary of State’s
Washington speech, blog readers may consult the website of the UK Foreign
& Commonwealth Office here.

The International Aviation Law Institute expresses it
appreciation to the Secretary of State and his associates, as well as to the
office of the UK Consul General in Chicago, for arranging and participating in
this timely exchange on the leading international issues affecting aviation law
and policy.

Airneth, a worldwide scientific network for aviation research and policy, has posted a new column from Professor Brian F. Havel on its website. Entitled "The Politics of Change: Prospects for the Second Stage of U.S./EC Air Services Negotiations," the piece "offer[s] some broad observations on some of the political challenges to globalizing the world's most visible service industry."

The United Kingdom's Secretary of State for Transport Geoff Hoon spoke at the International Aviation Club in Washington, D.C. yesterday. In his remarks (available online here), Hoon outlined a three-step process for progress to be made in U.S./EC aeropolitical relations:

Step one is a commitment to complete stage two of the EU/U.S. Open Skies negotiations by June 2010, with the headline objective of liberalising all foreign ownership in airlines to give European and American air carriers a bigger home market and the ability to operate like any other competitive international company;

Step two is a commitment to enhance open markets in aerospace products and related services, ending the talk of banning the use of foreign maintenance facilities and allowing a long awaited mutual recognition agreement between the EU and U.S. to come into force;

Step three is an agreement between the EU and U.S. on a clear approach to climate change in aviation, involving new fuel efficiency standards and meaningful global emissions goals.

Further comment on Secretary Hoon's remarks will be forthcoming on the blog.

Readers of the blog may be intrested to read the European Union's new press release on the EC/Canada Air Transport Agreement which is set to be marked during their ongoing summit in Prague, Czech Republic. As discussed on the blog previously, the Agreement envisions an eventual (although highly contingent) lifting of foreign ownership and control restrictions. The Q&A also contains a brief comparison between the Canadian Agreement and the U.S./EC Agreement which came into effect last year. It will be interesting to see what (if any) impact this thrust toward liberalization between two of the U.S.'s longstanding trading partners on its second stage negotiations with the EC.

The Spring issue of Volume 8 of Issues in Aviation Law and Policy (IALP) will be back from the printer and ready to send out to subscribers soon. For those unfamiliar with the journal's history, IALP was formerly published by CCH/Wolters Kluwer since April 2001 in looseleaf format. Beginning with Volume 8, the journal is being produced under the auspices of the International Aviation Law Institute in a more portable and readable perfect-bound format. What has not changed is the core concept which animated the launch of IALP eight years ago: to present articles and commentaries by leading policymakers, officials, analysts, academics, and industry leaders who have the experience and expertise to brief readers on the challenges confronting global civil aviation today and in the future. Articles from the forthcoming issue include:

Brian F. Havel, Commentary, In Praise of Law's Cosmos: Reflections on the Entreprenurial Spirit in Aviation Law and Policy

Pablo M. J. Mendes de Leon, A Tour d'Horizon of Contemporary Issues in Air and Space Law

Martin Staniland, Air Transport and the EU's Emissions Trading Scheme: Issues and Arguments

Vincent J. Power, Ryanair v. European Commission: The European Court of First Instance's Judgment on Alleged State Aid at Charleroi Airport

David E. Rapoport & Michael L. Teich, The Pre-Abdullah Consensus that Federal Law Does Not Preempt the Field of Aviation Safety in Tort Cases Should Remain the Law

Joseph Z. Fleming, The Application of U.S. Labor and Employment Laws to Airlines: Regulating the Global Labor and Employment Affairs of Airlines in a World That is Flat

Those interested in subscribing to IALP are encouraged to contact Stephen Rudolph, the Institute's Executive Director, at 312-362-5769 or by e-mail. A comprehensive two-volume archive of the first seven volumes of IALP is also available. Further information on the journal, including a complete list of past articles, is available on the Institute's website here.

As discussed on the blog previously, the European Commission has forwarded a proposal to the European Parliament and Council to temporarily suspend Council Regulation 95/93's "use or lose" rule where a carrier must operate 80% of its slots during the period for which they have been allocated in order to retain them for the next equivalent period. Under the Commission's original proposal, COM (2009) 121 final (Mar. 10, 2009), "slot coordinators [at EU airports] shall accept that air carriers are entitled to the same series of slots during the summer 2010 scheduling season as were allocated to them during the summer 2009 scheduling season." In other words, the airlines would be allowed to drop below the 80% threshold without risking slot forfeiture. The Commission's proposal also seeks to use the so-called "comitology" procedure to allow it to extend the slot rule suspension into the winter 2010-11 season if the Commission unilaterally determines that such a measure is warranted by the ongoing economic crisis.

A number of industry stakeholders and observers were immediately critical of the measure, charging that it would economically harm EU airports due to a decrease in the number of flights operated and bar potential new entrants from capturing surrendered slots. Initially, the cries did not go unheeded. In its draft report on the Commission's proposal, 2009/0042 (COD) (Mar. 31, 2009), the Parliament's Committee on Transport and Tourism offered a substantial amendment to the Commission's suspension plan which would lower the operating threshold from 80% to 75% to accord with an estimated 5% decrease in passenger demand rather than suspend the rule altogether. The Committee also added the following:

If, for a series of slots, the air carrier does not meet the 75% threshold for the summer 2009 scheduling period, it will be entitled to this series of slots only if no other air carrier has applied to use it for the same route. If one or more other carriers have applied to use it for this route, the slot shall be allocated by auction to the carrier making the highest bid. Air carriers, including incumbent carriers, to which a series of slots is new allocated under this paragraph, must commit themselves to use it for that same route for at least the next two corresponding periods.

This tempered modification of the "use or lose" rule could have assuaged fears that the Commission is moving to protect incumbents, undermine competition, and pass costs onto the airports and consumers. Unfortunately, the measure was short lived. In the Parliament's approved first reading of the Commission's proposal, A6-0274/2009 (Apr. 24, 2009), the full suspension of the "use or lose" rule for the summer 2010 season is back in. What is noticably out, however, is the Commission's hopes to use the comitology procedure to allow further unilateral suspensions. Any future proposals to suspend the "use or lose" rule would have to go through the Parliament and Council in conformity with the so-called "codecision" procedure. Interestingly, the Parliament also adjusted the second recital of the Commission's proposal to urge that any future proposal to suspend or modify the "use or lose" rule "should be made only if it forms part of a proposal for a general revision of" Regulation 95/93. In the opinion of the Committee on Transport and Tourism's Rapporteur, "[Regulation 95/93] on slot allocation requires a general overhaul in the near future, which addresses, among other things, competition issues as well as questions of slot ownership, trading etc." Assuming that such revisions would ensure that market-based measures are used to more efficiently (re)allocate slots and alleviate the capacity crunch at EU airports, they would be most welcome.

Michael Goldman, a named partner at the Washington, D.C. law firm Silverberg Goldman & Bikoff, has issued a white paper at Air Transport World entitled, "Elections Do Have Consequences: The Case for a New US-EU Stage Two Agreement." The title is a curious one since the 2007 U.S./EC Air Transport Agreement explicitly contemplates negotiations for a second stage agreement; no "case" needs to be made for one. Cf. Air Transport Agreement, art. 21, 2007 O.J. (L 134) 4. Arguably, however, there remains plenty of room to agitate for the specific content of a second stage agreement. Goldman believes--no doubt quite rightly--that the chances for progress to be made on liberalizing the U.S.'s rules on foreign ownership and control of airlines are slim. That doesn't mean, according to Goldman, that all hope for the second stage is lost. According to Goldman, the second stage could still yield "breathtaking" results in the form of "a substantial expansion of [seventh] freedom traffic rights; arrangements for mutual recognition of each side's greenhouse gas emissions/cap and trade regimes; resolution of the contentious environmental dispute on regulation of aircraft noise near airports; and the harmonization of transatlantic security rules."

While all of these potential elements of a second stage agreement are worthy of reflection, Goldman's optimism that an expansion of seventh freedom traffic rights is "achievable" may be unwarranted. Goldman asserts that "a broad exchange" of seventh freedom rights will "provide for balance[]" between both sides. As it currently stands under the 2007 Agreement, the U.S. recognizes the internal EC construct of the "Community air carrier," meaning all EU carriers are eligible for designation by all Member States for seventh freedom passenger/cargo combination services from both EU and European Common Aviation Area States. See Air Transport Agreement, supra, art. 3(1)-(3). The 2007 Agreement also provides for unrestricted reciprocal seventh freedom all-cargo rights, except that the U.S.'s rights are limited to the Czech Republic, France, Germany, Luxembourg, Malta, Poland, Portugal, and the Slovak Republic. See id. Annex 1, sec. 3. These rights are in addition to the exchange of unrestricted reciprocal third, fourth, and fifth freedoms which have long been part of the U.S.'s "Open Skies" template. It appears that Goldman perceives the absence of reciprocal seventh freedom passenger/cargo combination services and truly unrestricted all-cargo sevenths for U.S. airlines as creating an imbalance. But is this view tenable or, rather, does this view have equal purchase on both sides of the Atlantic?

In the years leading up to finalization and signing of the 2007 Agreement, the European Commission and other commentators had analogized a grant of fifth freedom rights to U.S. carriers with eighth freedom (cabotage) rights for EU airlines. A U.S. carrier could use the fifth freedom rights to pick up new passengers in London as an extension of a New York/London service and carry them onward to Frankfurt or Rome, for example. However, in order for an EU carrier service from London to New York to include enplaning new passengers in New York for continuing service to Los Angeles, eighth freedom rights would be required. It was an analogy U.S. negotiators were unwilling to accept for the purposes of the Agreement and yet one which remains important from the European perspective. Article 21 of the 2007 Agreement specifically mentions "further liberalisation of traffic rights" as part of the second stage agenda. Air Transport Agreement, supra, art. 21(2)(a). This agenda item has been interpreted by European Commission Air Transport Director Daniel Calleja to mean "European [airline] companies flying freely in the U.S. and U.S. companies flying freely in Europe. At the end of the day, you need full access on both sides." Yet "full access" as a means to achieve balance is not what Goldman is suggesting. He recognizes that eighth freedom rights will likely be off the negotiating table, but he fails to mention any incentive the EU might have to offer further seventh freedom concessions to the U.S. From the EU's perspective, any further grant of traffic rights to the U.S. without a further grant of new rights to the EU will only aggravate the perceived imbalance--an imbalance the second stage negotiations are presumably supposed to correct.

In addition to failing to take into account the backhistory of the 2007 Agreement and the EU's understanding of what constitutes "further liberalisation of traffic rights," Goldman also ignores the rise of protectionist sentiments in the U.S. as evidenced by Rep. James Oberstar's airline alliance and control provisions in the pending 2009 FAA Reauthorization Act. If either or both provisions are enacted, the EU will have even less an incentive to give the U.S. unrestricted seventh freedom rights. The EU may very well exercise its option to suspend rights under the 2007 Agreement beginning in 2012 as a means of retaliation. Given this aeropolitical backdrop, it is difficult to join in Goldman's optimistic appraisal of what is "achievable."

The Associated Press reported yesterday that U.S. Transportation Secretary Ray LaHood believes the Obama Administration will seek financial aid for U.S. airlines to assist them in making the necessary upgrades to their fleets for NextGen--the Federal Aviation Administration's plan to move from a radar-based to a satellite-based air traffic control system. The system, which is expected to cost at least $20 billion, isn't expected to be completed until 2025.

There is a not unreasonable tendency for brows to start perspiring when the words "aid" and "airlines" are used in the same sentence. Following the post-9/11 Air Transportation Stabilization Act which authorized the Government to guarantee loans to the airlines, concerns were raised that the legislation--though limited in scope--could prefigure reregulation. See Brian F. Havel & Michael G. Whitaker, The Approach of Re-Regulation: The Airline Industry After September 11, 2001, [2001-04 Transfer Binder] Issues Aviation L. & Pol'y ¶ 10,051, at 4101. This time out, however, it appears that the aid will be targeted to assist in upgrading the country's woefully inadequate aviation infrastructure and not to assist the airlines through a tough operating environment.

For those either unfamiliar with the current air traffic control system or wishing to learn more, the men's lifestyle magazine GQ recently ran a story entitled "Traffic," detailing the system's daily operations and its antiquarian mechanisms.